For decades, differences in labor prices have been a major influence on the continued shift of production from the United States to China. In 1980, the labor burden in the United States was more than 30 times that of China. As China has fewer agricultural and a greater share of its population has migrated to primary cities to paint in new factories, wages have increased dramatically. By 2018, the U.S.-China pay gap had narrowed to just 4 times, expanding to about 200% in the United States and to more than 2,000% in China in nearly 40 years. However, despite the sharp increase in Chinese production wages for more than 20 years, offshoring has continued. American production has suffered, adding millions of lost jobs, inflation-adjusted stagnant wages, and a decline in the middle class.
Wages in the United States and China from 1980 to 2018
China’s predictable pay rises do not tell the full story of America’s decline as a factory for the world. The creation of special and almost market-free economic zones, the probably endless source of affordable labor, and fully globalized shipping networks have allowed China to take credit for the maximum production burden in the United States, though perhaps the greatest progression was the relentless one. World. towards automation and robotics.
Replacing manual labor with machinery and software would possibly have had as much influence on the decline of U.S. production as the burden of foreign labor, domestic unions, and foreign industry policy. Whether by man or machine, parts of the U.S. production industry have struggled for decades to be competitive and relevant, which has led the industry to the remaining competitive benefits in niche, value-added, or material-dependent products.
Despite a steady increase in worker productivity, top U.S. brands have been unable to automate or lower logistics prices long enough to remain competitive, and relocation, basically in Asia, has become a sad truth for corporations of all sizes. When a company established a production presence in China and built a global supply chain, pressure was placed on its remaining competition in the United States to innovate or keep up. Some of the first U.S. brands to move abroad en masse were labor-intensive sectors, such as furniture and textiles, that adhered to brands with low transportation prices, such as prescription drugs and semiconductors.
About a decade ago, several U.S. establishments converged on the theory that significant adjustments were being made to the investigation of U.S. brands’ charges and benefits and could create a turning point for the relocation of certain products. The average hourly wage of a professional and reliable workforce in China and the cost of transporting manufactured products safely and successfully to consumers had evolved to the point where U.S. brands could potentially move their operations to the United States or relocate them to Latin America. His tipping point theory, based on China’s high production wages and complex and costly global transportation and logistics charges, argued that more than a dozen production sectors were likely to be relocated.
Today, nearly 10 years after the first publication of the tipping point theory, the U.S. production industry would possibly be on the verge of another sharp increase in activity. During the Great Recession and Y, U.S. production remained dynamic through low-volume, high-margin products. Given the existing public aptitude emergency and the response of the existing administration, the U.S. production sector. You can also only lose your past task losses in affected industries.
The U.S. production industry is at an exclusive and unprecedented crossroads. Of the dozen production sectors that in the past had prospects for relocation due to emerging labour prices and high transport and logistics prices, the tipping point has replaced the extra and the justification for domestic production seems more solid. As the global struggle to engage the coronavirus and perceive its long-term implications for our social, medical, educational and economic systems, Duff-Phelps has created new research into the previous turning point theory and incorporated several key strategic points that contribute more (or at least the same) than in a global post-COVID-19.
To update the study, Duff-Phelps adjusted to new global economic conditions, drew up existing knowledge for all primary production categories, and saw a new turning point for the production sectors. We begin our research by identifying, measuring and weighing key signals for corporations with production activities in China, adding load (labor and logistics), automation (labor productivity), innovation (RD, intellectual property, patents, etc.), quality and safety. , sustainability (environmental regulations and pollution) and national security (critical/essential designations). Specifically, our “relocation research” used six objective criteria to analyze 28 U.S. production sectors, known through the North American Industry Classification System (NSIC) codes, which were ultimately categorized according to those with the greatest rewriting potential.
The following six criteria and circumstantial points show the likelihood that a given domain will return to the coast:
Cost: low labor prices and higher logistics prices
Automation level: sectors that have noticed a significant increase in labour productivity.
Innovation and intellectual property: sectors with higher education and growth costs, namely valuable high-level assets incorporated into the production procedure or significant patent applications
Product quality and protection: sectors with stricter quality and protection (e.g. food, medicines)
Essential Business Designation: Companies, sectors, or products officially designated as critical or essential through the U.S. Department of Homeland Security. Or government authority
Environmental regulations: sectors whose capital load justifies capital investment in genuine properties or innovations that allow production to meet or exceed U.S. emission or pollutant regulations.
In our research on the six main criteria and 28 sectors, a combination of the 8 best-qualified production categories emerged as the maximum maximum potential resettlement applicant in the United States. They accentuate the characteristics of a small workforce and the best transportation prices and provide some of the most complex robotics, automation and production techniques in all generation industries. Its production processes are more in line with U.S. environmental regulations, labor laws, high-level asset protection, and customer protection standards. Its profit margins and global demand also tend to alleviate considerations about the investment prices of relocation. Given the renewed focus of the U.S. government. In national security and essential goods and facilities as a result of COVID-19, the following commercial sectors will want to rethink their production prices, the reliability of the source chain, and the threat of a significant business disruption, even if the pandemic continues. :
Industry flows between the United States and China and key candidates for relocation
Today, burden is not the only vital thing influencing the commercial footprint of U.S. companies. Based on the following, U.S. production may be economically viable for more sectors, and the U.S. would possibly revel in the effects of active and passive relocation when corporations consider these variables:
Economic
Environment
Geopolitical
Domestic polytiches
Regardless of the effect of COVID-19 on the global economic structure, it is highly likely that many primary U.S. production operations remain anchored in China, as U.S. production remains labor-intensive and/or global distribution remains profitable. However, our research suggests that other points beyond economic points are more weighted and that many products traditionally manufactured in China and intended for U.S. consumers or other markets around the world have the greatest chance of relocation.
Gregory Burkart is managing director and global leader in variety consulting and incentives at Duff and Phelps. Kurt Steltenpohl is General Manager of Duff-Phelps’ Transaction Advisory Services department and Chief Operating Consulting Officer.
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Just when you imagine that the payment terms of suppliers can’t get worse…
Some things never seem to change. One is that the adjustments to the payment plan implemented through OEMs end up being on their merits and to the detriment of their suppliers. For example, OEMs accumulate the time between when they get the product from the supplier and when they pay for it. For example, it is not uncommon for OEMs to pay 90 net days or 120 net days. Although I have not tried, I am quite sure that when buying groceries, such a proposal would not work. It is also not uncommon for an OEM to adopt such a strategy to increase payout time every two years. That’s a good offer.
I once wrote a column in which I called flight practice of this type because it reduces the value paid through OEMs for their products, due to inflation that still exists, at least at some point, and increases supplier prices as they have to finance their “inventory” of finished products for a longer period.
A few years ago, some OEMs began to use another approach, which or not was even scarier than simply extending payment times. Specifically, it was about outsourcing vendor invoices through OEMs. In this scenario, an OEM would pay a reduced portion value to a third party whose business plan was based on the ability to pay suppliers the value they had paid.
The third had a lot of flexibility in the way it worked with OTF suppliers. For example, they had space to accumulate the time between receiving the goods through the OEM and paying them through the vendor. The carrot they then presented to suppliers may simply get a prepay to settle for a decrease in value. Keep in mind that the worthwhile relief that the third party needed to justify its participation included the relief agreement obtained through its OEM consumer and the profitability goals of its own business.
You may ask “how insidious is this? Just take a look at the type of advertising language used through third parties to convince OEMs to paint with them. One of the classified ads said:
“Ask your suppliers to finance their operations.”
We are now informed that Lockheed, General Motors and Ford are offering a program that will pay suppliers in the short term. But you only have to take a look at the main points of the program to perceive that it is more like the two systems described above than a blessing to the suppliers.
Specifically, those OEMs use banks as third parties that pay bills. Banks then rate their rates, which come with a safe profit point, to suppliers. In the end, the bank earns cash and the provider receives a prize in lower currency. And I don’t know, however, I suspect that the OEM receives some kind of commission from the bank for its activity that, if so, would also be included in the bank’s commissions.
At that time, the OEM’s payment terms were 30 net days. This was in the age of paper, and the 30 days took into account the procedural time required by the OEM to obtain the device and procedure costs. Providers, for the most part, identified and accepted this as a realistic overdue payment.
Learn more about Paul Ericksen’s articles on chain management
Today, receipts and invoices are made electronically, so you believe that not even 30 days would be mandatory for receipt and payment transactions to be made. For example, today, a user can move the budget from a savings account to their existing debit card or account over the phone. Instead of reducing delays, OEMs have commonly built them without a practical explanation as to why, apart from increasing the profitability of their own businesses at the expense of their suppliers. No vendor you have been in contact with has admitted that there is a process-based desire for OEMs.
What is the result when this happens? In the short term, an OEM would likely suffer a decrease in curtain costs. However, over time, supplier value increases are mandatory to remain viable and OEM merit no longer exists. But, this is still vital, the desire of suppliers to request value increases puts the challenge directly into the strength of OEM purchasing functions. In other words, much of the education of purchasing staff is to delay, cut or even reject valid value increases, i.e. those generated through customers. There’s a law.
Some things concern me about the total payment terms factor, which I will describe below:
For example, a few years ago, a Fortune hundred aircraft manufacturer announced that it was expanding the net payment era from one hundred days to 120 net days, and also required suppliers to reduce their costs by 15%. If they were not satisfied with these two changes, the OEM threatened to withdraw its business, even if existing contracts existed.
One of the suppliers of this company was another giant company. They possessed the intellectual assets of their designs, which they sold to the aircraft manufacturer necessarily as a “black box” component. The company promptly rejected its customers’ requests and received a pass. SMEs, however, do not have as much influence and have to settle for customer dictates.
Writing this column is cathartic to me. For what? I don’t like stalkers and I think one way to protect yourself from them is to highlight their harassment.
In my opinion, the 3 scenarios described constitute a form of intimidation and an OEM source chain practice at its worst. I would like to hear from readers about the reports they might have had with this and how they reacted. Given the volume and nature of the responses I receive, this factor could be another smart point for a broader reader survey.
Paul Ericksen is IndustryWeek’s network advisor. He has 40 years of industry experience, mainly in control with two main original OEMs.
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